Let’s bring this back to where it began, with Charles Akre, whose speech
“An Investor’s Odyssey” set this Phelpsian quest in motion. (See chapter 1.) Akre has a couple of 100-baggers under his belt, and a lifetime of investing has taught him the key principle behind making 100 times your money.
While this book was in its final stages, I met Akre in his office, which is far away from the frenetic pace of Wall Street.
I drove down along the western edge of the Washington beltway.
Then I headed west, deeper into Virginia. The urban landscape gave way to green fields and woods. I drove past wineries and horse farms and fieldstone fences, and past little towns with antiques shops and historic mills and churches.
Eventually, I came to Middleburg, a picturesque little town of about 600 people. Then, down a quiet side street, I found a nicely refurbished building that used to be a tavern but was now an office.
Here is where Charles T. Akre Jr. (“Chuck”) has his HQ. It has a calm and comfortable feel to it, with bookshelves full of books and horse-themed art on the wall. I felt as if I was in someone’s home.
Akre, 72, has been in the securities business since 1968. He’s one of the great investors of our time. I have a bound volume of his letters to partners from 1993 to 2013, titled The Power of Compounding. A dollar invested with Akre turned into nearly $20, compared with just $5.59 for the S&P 500.
As I noted, it was a speech Akre gave in 2011 that introduced me to Thomas Phelps and his book 100 to 1 in the Stock Market. Phelps’s book is one of Akre’s favorites. So I was glad to spend some time with him and members of his team—Tom Saberhagen, Chris Cerrone and Ben Fox. We went to lunch at the Red Fox Inn & Tavern, which has been around since 1728 and is only about 400 feet from his office.
Akre, as I mentioned, had a couple of 100-bagger stocks in his portfolio.
He bought Berkshire Hathaway stock back in 1977, paying $120 per share. Each share is now worth an astonishing 1,750 times what he paid.
Here’s a funny story about this. On my way out, Tom, who is a portfolio manager and partner of the firm, gave me that bound copy of Akre’s letters.
This is unputdownable reading for me. I love this kind of stuff and read these things like other people read novels.
In a 1995 letter, Akre tells the story of how when he was a young broker, he bought a share of Berkshire. He went on to accumulate about 40 shares. Then he decided in 1981 to get into real estate. He had a con-do-conversion project and needed the money. So he sold all his shares save one for $500 per share. Of course, that turned out to be one super expensive project. Those 39 shares—worth $19,500 back then—would be worth $8.1 million today.
The other 100-bagger is American Tower, spun off from American Radio back in 1998. Akre paid about 80 cents for each of his first shares, and they are now worth $93 per share. This stock he still had as of our meeting, and it was his largest position, according to filings.
Akre’s approach is simple and easy to understand. He calls it his three-legged stool. He looks for
• businesses that have historically compounded value per share at very high rates;
• highly skilled managers who have a history of treating share-holders as though they are partners; and
• businesses that can reinvest their free cash flow in a manner that continues to earn above-average returns.
We’ve talked about all of these in this book.
As he told me, though, the older he gets, the more he whittles things down to the essentials. And the most essential thing is that third item.
This is the most important principle behind the 100-bagger. In one of his letters, he puts it this way: “Over a period of years, our thinking has focused more and more on the issue of reinvestment as the single most critical ingredient in a successful investment idea, once you have already identified an outstanding business.”
Consider a business with $100 invested in it. Say it earns a 20 percent return on its capital in one year. That is a high return and would get Akre interested. A 20 percent return implies $20 in earnings. But the key to a really great idea would be a business that could then take that $20 and reinvest it alongside the original $100 and earn a 20 percent return again and again and again.
As an aside, you’ll note the absence of dividends. When a company pays a dividend, it has that much less capital to reinvest. Instead, you have it in your pocket—after paying taxes. Ideally, you want to find a company that can reinvest those dollars at a high rate. You wind up with a bigger pile at the end of the day and pay less in taxes.
To get back to the example, at the end of that first year, you would have $120. Soon after, the magic starts to happen:
At the end of the fourth year, you’ve doubled your money. At the end of 10 years, you’ve got a six-bagger. And in about 25 years, you’ll have
1
100x your money. Of course, you don’t have to hold for the whole time.
And there is no guarantee a business can keep up such a pace. I’m just showing you the power of compounding.
Compounding is what lies at the heart of Akre’s approach. He wants to find that great business and just sit tight—just like Phelps.
I’d also add that Akre runs a focused fund. His top five to seven ideas often make up half of his portfolio. This is something we’ve covered in chapter 10. The great investors concentrate on their best ideas.
At lunch, we just talked about businesses and stocks the whole time.
Akre was cheerful and relaxed; he never checked his phone. He was full of wise words on investing, and funny too. He talked about Phelps and about 100-baggers. He talked about books read and lessons learned. This is the way great investors talk.
Believe me, I’ve met a bunch of them, from Ackman to Wanger. (Bill Ackman of Pershing Square fame you probably know. Ralph Wanger you may not. He ran the top-performing Acorn Fund for a lot of years and wrote a fine book about investing titled A Zebra in Lion Country.)
You might find it instructive what we didn’t talk about:
• We didn’t talk about the Fed.
• We didn’t talk about the overall market.
• We didn’t talk about the dollar.
Not that those things are unimportant. They are important. But they are unknowable and unpredictable things. And great investors don’t spend a lot of time on them. They focus on trying to find those great opportunities—like Berkshire Hathaway and American Tower were for Akre. These stocks just overpowered all those big-picture concerns.